NURS 6211: Finance and Economics in Health Care Delivery | Week 6

Health care organizations attempt to stay as current as possible with equipment and resources, but today, this can be a costly effort. Just one Magnetic Resonance Imaging (MRI) machine costs millions of dollars. Major purchases such as these are included in capital budgets, and ultimately have an impact on the clinical, operational, and financial budgeting process of an organization.

This week, you focus on major expenditures such as equipment and facilities. It is important for nurse managers to understand how capital budgets function so they can make informed contributions to the decision making process.

Learning Objectives – NURS 6211:Week 6: Budgeting–Part 2 Assignment

Students will:

• Apply principles of capital budgeting to management decision making
• Justify expenditures on a capital budget

Learning Resources

Note: To access this Week’s required library resources, please click on the link to the Course Readings List, found in the Course Materials section of your Syllabus.

Required Readings

Baker, J. J., Baker, R. W., & Dworkin, N. R.  (2018). Health care finance: Basic tools for nonfinancial managers (5th ed.). Burlington, MA: Jones and Bartlett Learning.

• Chapter 17, “Capital Expenditure Budgets” (pp. 197-203)The focus of this chapter is capital expenditure budgets and how they differ from operational budgets. It discusses how to develop and evaluate capital expenditure proposals.

Zelman, W., McCue, M., & Glick, N. (2009). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications (3rd ed.). Hoboken, NJ: Jossey-Bass.

• Chapter 8, “Capital Financing for Health Care Providers” (pp. 329–373)This chapter explores two types of financing—equity financing and debt financing—as well as the bond issuance process that can be used to finance capital expenditures. Additionally, the authors discuss the option of lease financing, a possible alternative to the two other types of financing.

Danna, D. (2014). Essential business skills for nurse managers. Health Leaders Media. Retrieved from http://www.strategiesfornursemanagers.com/ce_detail/204441.cfm#

This article discusses the need for nurses to understand the business skills necessary in healthcare today.

Himmelstein, D. U., Jun, M., Busse, R., Chevreul, K., Geissler, A., Jeurissen, P., & Woolhandler, S. (2014). A comparison of hospital administrative costs in eight nations: US costs exceed all others by far. Health Affairs, 33(9), 1586-1594.

This article compares the hospital administrative costs in several nations.

Zismer, D., Sterms, J., & Claus, B. (2011). Capital efficiency and integrated health system designs. Healthcare Financial Management, 65(7), 88–90, 92, 94.

In this article, the author examines how system designs play a crucial role in capital efficiency and return on investment. The author also analyzes how this role may change in the future.

Discussion: Making the Case for Capital Budget Expenditures

As a nurse, you are probably very aware of and can speak to the emotional reasons behind the need for certain major expenditures such as a new nurse’s lounge or replacing the current patient information system with a new digital system. You would love to see your nurses have a comfortable area where they can rejuvenate from a stressful day with patients. Alternatively, nurses carrying around PDAs would certainly ease the recording and transmission of vital patient information. However, as a nurse manager you need to be able to support those emotional appeals with reliable financial data. Having a place to refresh will help nurses be more efficient, and could reduce sick days and nurse errors. Being able to quickly access doctor’s orders and previous nurse’s comments allows for a more timely response to patients. As your responsibilities expand, you may find yourself at the table when decisions about capital expenditures are being debated. It is therefore to your advantage to understand the workings of a capital budget.

In this Discussion, you consider the impact of both financial and emotional factors in making a capital budget decision,

To prepare:

• Review the information on capital budgets in this week’s Learning Resources.
• Consider why it is important for nurse managers to understand the capital budget of an organization. How are capital budgets used in your own organization (or one with which you are familiar)?
• Reflect on the importance of thinking strategically when developing this type of budget.
• Identify a new piece of equipment you would like to see purchased by the organization. Consider how knowledge of capital budgeting could influence your approach to making the request.
• Develop strategies for demonstrating the need for this capital expenditure that take into account both financial and emotional considerations.

By Day 3

Post an analysis of why it is important for nurse managers to understand principles of capital budgeting. Describe a costly new piece of equipment you would like your organization (or one with which you are familiar) to purchase. Explain strategies for demonstrating the need for this equipment to decision makers. Briefly outline how you could use financial data and emotional appeals to demonstrate the benefits of this purchase.

Read a selection of your colleagues’ responses.

By Day 6

Respond to at least two of your colleagues on two different days. Suggest an additional strategy for demonstrating the need for the equipment they described and why you believe it might be successful … NURS 6211:Week 6: Budgeting–Part 2 Assignment

 

 

ADDITIONAL INFORMATION 

Principles of capital budgeting to management decision making

Introduction

Capital budgeting is a type of financial planning that involves setting out an organisation’s long-term investment plan, for any new assets that are needed. This can include everything from building new offices to buying machinery to expanding production capacity. It is important for companies because it helps them make smart decisions about spending money on productive assets that will increase their value over time.

Capital budgeting involves setting out an organisation’s long-term investment plan, for any new assets that are needed.

Capital budgeting involves setting out an organisation’s long-term investment plan, for any new assets that are needed. It is used to decide whether to invest in new assets and/or new projects, and assess the economic viability of each project.

Capital budgeting can be used to help management make decisions about long-term investments:

• To decide whether it makes sense for a company or organisation to buy something (like a car), or upgrade its existing equipment.

• To decide which projects should be prioritised over others when there are limited resources available for investment

Capital budgeting can also help management make decisions about new projects:

Companies need to spend money on long-term assets

Companies need to spend money on long-term assets. The need to invest in assets that will last for a long time is one of the most important principles of capital budgeting, but it’s not always easy for companies to make decisions about how best to allocate their resources.

Capital budgeting helps companies decide which productive assets should be funded with new capital and which ones can be replaced by existing profits or cash flow from operations. Capital budgeting also allows them to figure out which projects are worth pursuing, whether they’re likely to succeed or fail and what risks they pose if they fail (or don’t succeed).

Investment decisions are often very complicated because there are so many different factors to take into account.

Investments are often very complicated because there are so many different factors to take into account. This is especially true when it comes to capital budgeting, which involves the analysis of many different aspects of an investment project and its future cash flows.

The main factors that need to be considered in making an investment decision include:

• Cost of Capital – How much should we pay for this project? What’s the risk involved with bringing it online? Are there any guarantees that we’ll get paid back if things go wrong or if our competitors come along with better deals (which they will)? These questions can help you determine what your maximum return on investment should be before moving forward with a particular technology/service/product idea.

• Project Risk – Will our business suffer through poor sales due to poor marketing efforts or poor product quality control? Are we putting too much money into research & development instead of other areas such as marketing campaigns or advertising materials? Why should potential customers choose us over other companies offering similar services? These questions help determine whether or not there’s enough value being created by each dollar spent—and therefore whether those dollars would yield greater returns than others possible investments within our business plan.”

Capital budgeting identifies what projects a company should undertake and whether the project enhances the firm’s value.

Capital budgeting is the process of deciding whether to invest in a new project. The decision makers use capital budgeting to identify which projects will create the most value for the firm, and then decide which ones they should spend their money on.

Capital budgeting helps managers make decisions about investing in long-term assets such as property, equipment and intellectual property (IP). It also helps them decide how much money each asset needs so that it can be used at its full potential.

Because capital budgeting decisions are long-term ones, companies use a decision making tool called net present value (NPV).

A second decision-making tool you can use is net present value (NPV). This helps you evaluate different projects and compare their financial impact over their life.

The NPV of a project is the sum of all discounted cash flows, where each cash flow is equal to its initial amount, plus interest or dividends earned on it, plus any additional profit made by selling off parts at later stages. It’s calculated by discounting future payments back to today so that they reflect what they would be worth in today’s money.

This involves understanding how each project is expected to perform, how much it will cost and then comparing it with other possible projects.

NPV is the value of all future cash flows, discounted back to the present. It can be calculated using the formula:

(Gain from project – Costs) / (Costs + Gain)

The NPV technique relies heavily on the concept of present value.

The technique relies heavily on the concept of present value.

Present value is a way of calculating the value that something will have in the future, based on how much you’re willing to pay now. If you know how much money you’ll need to invest today and how much interest it will earn over time, then you can use this knowledge to determine whether or not your investment makes sense for your company’s situation.

The NPV technique for capital budgeting calculates what each project should cost before any money has been spent on it (the initial investment), as well as what each project will cost when all expenses have been paid off (the terminal value).

Careful capital budgeting is key to making good decisions about spending on productive assets

Capital budgeting is a process of evaluating the profitability of projects, and it’s an important part of making good decisions about spending on productive assets. NPV is a technique for evaluating the profitability of projects. It uses the present value (or discounted future cash flows) to evaluate projects:

• NPV = FV/(1+r%)

Where: FV = future value; r% = interest rate on investment

Conclusion

We hope you’ve enjoyed learning about the principles of capital budgeting. We know it can be a difficult subject, but with some time and effort, it’s possible to understand the concepts behind this important decision making tool. You can apply these ideas in your everyday life by being more careful about how much you spend and when you spend it.